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AS - 16 Borrowing Costs
AS - 16 Borrowing Costs
AS - 16 Borrowing Costs
Borrowing Costs
Date
Presentation on AS 16
Applicability:
• Mandatory in nature w.e.f. April 1, 2000.
Objective:
• Prescribe accounting treatment for borrowing costs.
Scope:
• Should be applied in accounting for borrowing costs
• Not Applicable to:
imputed costs of owners’ equity, including preference share
capital not classified as liability.
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Presentation on AS 16
Definition:
• Borrowing Costs- Interest and other costs incurred in connection with borrowing of funds.
• Qualifying Asset- An asset which necessarily takes a substantial amount of time to get ready
for its intended use or sale.
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Presentation on AS 16
Definition(…Contd.):
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Presentation on AS 16
Recognition:
• Borrowing costs directly attributable to the acquisition, construction or production of the qualifying asset should be capitalised as cost of the
asset.
• Other borrowing costs should be recognised as expense in the period in which they are incurred.
• Costs to be capitalised only -
if probable to result in future benefits; and
such costs can be measured reliably
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Presentation on AS 16
• Funds borrowed specifically - actual cost incurred during the period less any income on the temporary investment of those borrowing
• Funds borrowed generally - cost should be determined by applying a capitalisation rate to the expenditure on that asset
Capitalisation Rate - the weighted average of the borrowing costs applicable to borrowings that are outstanding during the period other than
funds borrowed for specific purpose.
• Borrowing costs capitalised during a period should not exceed the total borrowing costs incurred during the period.
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Presentation on AS 16
Commencement of Capitalisation:
• Capitalisation of borrowing costs should commence when the following conditions are satisfied:
expenditure for acquisition, construction or production of a qualifying asset is being incurred
borrowing costs are being incurred
activities for preparing the asset for its intended use or sale are in progress.
• Incase of general borrowings, the capitalisation rate should be applied to the average carrying amount of an asset including
borrowing costs previously capitalised.
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Presentation on AS 16
Suspension of Capitalisation:
• Capitalisation of borrowing costs should be suspended during extended periods in which active development is
interrupted.
• However capitalisation of borrowing costs is not suspended when substantial technical and administrative work
is being carried out or when temporary delay is a necessary part of the process to get an asset ready for intended
use or sale.
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Presentation on AS 16
Cessation of Capitalisation:
• Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the
qualifying asset for intended use or sale are complete.
• When construction of a qualifying asset is done in parts and a part is capable of being used while construction
continues for the other parts, capitalisation of borrowing costs in relation to the completed/ substantially
completed part should cease.
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Presentation on AS 16
Disclosure:
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Presentation on AS 16
Issues:
• Does not apply to ready to use assets. Should not the interest on loan acquired for a specific asset be capitalised?
• ‘Average carrying amount of the asset’ i.e. The amount to which capitalisation rate is to be applied, not defined in the Standard.
• Average capitalisation rate to be applied to carrying amount plus interest previously capitalised. Should interest previously capitalised also be considered?
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